The fall of the Tory party

She proposed tens of billions of pounds of unfunded tax cuts, it spooked the markets and BoE tried to put the flames out with interest rate rises. Sunak warned her of the outcome of her proposals in their leadership race previously, she threw her co-conspiritor Kwarteng under the bus as a sacrificial lamb and couldn't hold a press conference witout a plethora of errs and umms.
She was an unmitigated disaster, promoted stratospherically beyond her ability and this pro Trump bollox just exemplifies her lack of political acumen. Was a Lib dem then a Tory was a remainer then a Brexiteer. Her one true ability was that of knowing which way the wind was blowing for bandwaggoning purposes.
Oh and she killed the Queen

As with most things in politics reality doesn't matter, its the narrative.

in this case Truss/ the Torys were more culpable than Labour were for the 2008 financial crisis.

If the Truss Crash had happened under Labour it would of been called a Sterling Crisis, been proof that the Markets had no faith in the Government,PM and leadershit of UK PLC and shouldn't ever be trusted with our economy ever again.

Of course the tories are now trying to tell the big lie that they and only they fiscally competent. Not their fault etc.There's a reason she was ousted by a palace coup after 49 days.

Lets not forget!

It appears to be the case that the Tory's self-proclaimed status as the 'Natural Party of Government' is conclusively disproven once a generation.
John Major presided over Black Wednesday in 1992.
His administration never recovered from this failure leading to almost 5 years of drift for the UK.

Liz Truss chose to ignore all the checks & balances that temper changes to economic policy. She had no mandate for her cavalier actions, just the support of the non-representative Tory party membership.

Far from the Bank of England being able to signal that it was considering whether interest rates needed to be examined, giving mortgage lenders several weeks even a months notice to work with mortgagees who were approaching the end of their fixed terms, the BoE had to take urgent action.

Liz Truss and her unelected advisors from various 55 Tufton Street lobbyists did not understand 'the Markets' they claimed to worship.

Liz Truss should never have been a Cabinet minister let alone elected Leader & Prime Minister. She should have admitted her ignorance and exitted public life.

If she was in any doubt of her value to the political discussion her defeat in the General Election should have penetrated her world view.

Oh and she killed the Queen

She did one good thing by accident - doesn’t get her off the hook for the other shit.

Sticking up for Kwartengs disaster budget is a strange hill to die on. I don't think anyone is suggesting the pair of them are entirely responsible for the current state of the economy, but their mini-budget had a instant effect on mortgage rates partially because the economy was already looking ropey and they went in for the socker kick to the head.

So all things told. You're a fan?

This is a free link. Explains the enduring effect of Truss’ ‘moron premium’ pretty well.

Giving away billions in unfunded tax cuts pissed off the bond traders, raising the interest on government borrowing, which spooked the markets. It also had obscure but potentially catastrophic consequences for pension funds, which Truss/Kwarteng should’ve paid attention to. And yes, it led mortgage lenders to ramp up interest rates and withdraw products in the turmoil, leading to entirely foreseeable damage to the UK property market.

Tl;dr - She’s a moron and we all paid the premium.

The question is whether it’s really been a convenient cover for banks to increase their profit, rather than something that deeply affected market dynamics in any permanent way. From your link:

The BoE’s view appears to be that the chaos of Truss’s period in government allowed banks and building societies to rebuild profit margins on their mortgage deals and reduce competition, to the detriment of households.

Jon Cunliffe, BoE deputy governor for financial stability, said this month that cheap mortgages before the “mini” Budget stemmed from banks wanting to increase market share, leading to profit margins becoming “very compressed”. That was no longer true, he added.

The graph shows its effect quite well on bond yields, which seems pretty temporary to me.

Truss appears to be punished by the press mainly for seeking a heterodox monetary position, rather than the real problem of the mini-budget being Truss/Kwarteng’s aim to expand neoliberalism. That’s problematic when it’s fairly clear that we’re going to need to rely on some heterodox ideas to get out of our current economic funk.

The first response for any change will now be “won’t anyone think of the bond traders?”, rather than discussion about where we can have some reasonable democratic control of parts of the economy that aren't working.

1 Attachment

punished by the press mainly for seeking a heterodox monetary position

'punished by the markets for increasing their risk by appearing to be a maniac' is the truth of it

More than just the unfunded tax cuts, it was the combination of sacking the widely respected permanent secretary of the Treasury on day 1, refusing to let the OBR produce forecast for the budget, and talking about how said budget was only the beginning and things were shortly going to get even wilder

The markets aren't so much committed to the orthodoxy, as they are afraid of not being able to predict what's coming because the people in charge are dogmatic morons. There is plenty of scope to rewrite all the rules provided you do it carefully and predictably

They certainly went about it with reckless abandon, I agree. I'm not a huge fan of the OBR, but refusing their forecast was obviously going to spook some traders.

Sacking the permanent secretary of the Treasury though, I don't see that as being unreasonable if a government wants to move away from their typical 'treasury-brained' ways. Reporting on it as an argument for Truss' personal failings is just another bit of Westminster psychodrama, so I'd be inclined to ignore it.

The markets aren't so much committed to the orthodoxy

I think that's debatable, and regardless of their potential reaction to heterodox policies, the press has already learned to react to any change negatively. That's limited current and future governments' ability to change the rules, even when done carefully.

(Edit: not that Labour are interested in doing so anyway)

It is, as you indicate, complicated, but the blame here does not fall on the shoulders of the press.

If one wants to pursue ‘heterodox policies’, fine (though of course she had absolutely zero mandate). However, one needs to get or keep the people that bankroll this state on side. That means cosying up to bond markets, pension funds, analysts, hacks, etc beforehand. To not do so is utterly moronic, regardless of whether the policy is the right one or not for the UK.

I don't disagree at all with that, although the press clearly play a large part in what happens next. Labour would be idiotic not to pick it up as a line of attack, and of course they have, and will continue to mention it for years to come. It's politically convenient to say the least, but also deeply favours the status quo.

My frustration is that we'll likely see less progressive experimentation in macroeconomic policy because of it, and that's to society's detriment.

I listened to a series of Robert Peston’s the rest is money (I’ll find a link shortly) on the mini budget. If anyone can listen, understand and explain it to me in simple terms I’d be very grateful, but from memory the gist seemed to be that there were “pools” of invested money that were specifically fucked by the mini budget, and that no one had told truss & Kwarteng about, because no one (eg BoE) understood them either.

This is part 1 of 5

I don't have time to listen to it at the moment but are you referring to UK government bonds and pension funds?

https://archive.is/iO2Mg

I wouldn't say "no one understood them" - the BoE specifically stepped in to prevent the situation from worsening. But they do seem to be complicated.

Either way my layman's understanding is:

• The UK government issues gilts which pay X% interest over whatever period of time, which you can buy for a price
  
• Government announced massive unfunded tax cuts which means they were going to have to borrow loads of money, which means the internet rate on gilts was likely to increase
  
• Gilt prices dropped off a cliff, because why would you buy a gilt that pays 2% when you can wait a few months and buy a gilt that pays 6% instead?
  
• Gilt prices falling has massive knock-on impacts on pension funds who rely on gilts and instruments based on gilts to have predictable income/growth
  
• Pensions were forced to sell off their own gilts to cover their liabilities
  
• Gilt prices fall even further causing more sell offs.
  
  

that no one had told truss & Kwarteng about

Also it's not just the case that no one told them. They deliberately avoided asking for advice from some of the budget/treasury bodies because they knew that what they had planned was bonkers.

• Gilt prices falling has massive knock-on impacts on pension funds who rely on gilts and instruments based on gilts to have predictable income/growth
  
• Pensions were forced to sell off their own gilts to cover their liabilities
  

This is the important bit. Pension funds were doing weird derivative shit in schemes set up by major banks (LDIs, or liability-driven investments), rather than simply taking the yield from the bonds they already held (the value of which would have increased…), or doing what the financial industry is really meant to do and invest in the real economy.

That process was not properly policed by the Bank of England's financial policy committee.

This is a good listen, thanks for posting!

This is the bit I didn’t really understand, and still not sure I do. It’s also the bit that Peston suggests took the BoE by surprise and was the bit I meant when I said no-one understood.

Thank you! All v interesting. I will re listen and see how much more I get this time. They made the other good point that the victors write history, and the BoE and treasury have pushed a narrative of 100% on Truss, but it’s more nuanced apparently.

simply taking the yield from the bonds they already held (the value of which would have increased

The problem (or one of them anyway) was that the value of existing gilts decreased, I think?

There's the tradable value of the bond, and the yield provided to the bond holder from government. The yield went up, and the tradable value went down due to the market being flooded with bonds.

So if they weren't engaging in funny business with derivatives, they'd have been given more free money from government (for index-linked bonds, at least). But they had to sell them at a reduced price in order to pay their creditors.

The whole thing is bizarre, frankly.

This is the bit I didn’t really understand, and still not sure I do

That makes two of us! It sounds like some short term betting of some kind on bond yield rates(?), but all of the financial jargon of margin/option calls goes right over my head.

Peston mentioned Toby Nangle's article talking about it in the summer before it all kicked off, I think this might be it:
https://www.ft.com/content/83927688-e0d1-4934-8d91-e279da6d6b6c (archive link)

It's not that bizarre. They used some instruments to achieve some level of "risk"/growth/income under the assumption that the government wouldn't do something incredibly risky and stupid. It may have been a perfectly sensible and safe thing to do in the past. Unfortunately a pair of morons decided to do something unprecedented without allowing anyone to look at the impacts beforehand.

Ah awesome - I’ll read that.

A question: When the “yield goes up”, does it actually?

IE 10% coupon on £100 bond. Market value of bond drops to £90, effective yield 11.1111%.

I may have just answered my own question. Yield and face value coupon/interest are not the same thing. But, if you bought it for £100, then for most purposes*, you’re still getting 10% return on what you paid, regardless of current face value?

You seem to understand a lot more about this than I do. You said you don’t have time, but it would be great to hear what you think. The relevant bit on LDIs is ~13 mins long from 27 mins in that first episode.